By Dr Eric Balan
Trade agreements can be exciting. They facilitate opportunities, and more so if the trade agreement involves a wide region for free trade. The RCEP is one that is sizzling right now on the economic pot. It is creating a buzz in the market and firms are preparing and are pumped up taking their position at the starting line. The race to capitalise on the RCEP’s offerings is just a trigger pull away.
The multilateral RCEP that was signed on 15 November 2020 at the virtual ASEAN Summit hosted by Vietnam will take effect 60 days after it has been ratified by at least six ASEAN and three of the five FTA partner signatories.
It may take a few months to begin and years to complete but sources at the forefront of the RCEP are optimistically saying that the initiative could begin as early as the middle of this year. For countries which already have free trade agreements with each other, an added benefit of RCEP is that it creates a common set of rules of origin, which will facilitate easier movement of goods between the 15 members. Specifically, which areas are open to tariff reductions under RCEP is complex and it changes from country to country.
This makes the excitement convoluted and gives rise to the “spaghetti bowl effect”. The RCEP is seen as a regional initiative but the success of it will still depend on national sovereignty openness, preparation, and readiness. The RCEP consists of three large economic blocs; the ASEAN bloc, the Australia-New Zealand Closer Economic Relation Trade Agreement, better known as ANZCERTA, and the East Asian giants of China, South Korea, and Japan. These are very large economies with very distinct geoeconomics and geopolitical positioning and are regionally different.
In the phenomenon of international economics, national trade policy complications arise from the effects of political and economic risks when firms begin investing, buying, and selling in countries that have complex, malfeasance, and uncompromising intellectual property rights and contract law measures. Half-finished products and parts that require production assembly are crossing borders using different tariffs in an effort to export finished products to consumer countries at the lowest price.
Although the RCEP will gradually lower tariffs over time, it also aims to boost investments and facilitate (freer) product movements within the region. However, the application of domestic rules of origin in the signing of free trade agreements across nations would discriminatorily affect trade policies because the same form of products and commodities are crossing borders that are subjected to different tariffs and tariff reduction for the purpose of domestic preferences. The product crossing lines are likened to strands of spaghetti tangled in a bowl.
‘Noodle bowl effect’
In the context of the RCEP’s trade among Asian nations, the effect is better known as the "noodle bowl effect". Free trade agreements can often be and lead to contradictory outcomes among trade partners even with a signed agreement established because the bottom line will always be about national interest and firms’ protection from partnership abuse, supply chain exploitations, economic manipulations, and political operations. The RCEP is a government orientated initiative and firms should take heed of this and allow the government to open doors.
In the meantime, as measures of preparation, firms must gear up to understand the applications and implications of the RCEP trade agreements. The dynamism of the RCEP will change in accordance with the region’s stability and individual country’s trade understanding with each other that can affect the larger positioning and vision of the RCEP. For the moment, the RCEP region is sitting in the middle of two very large conundrums, the South China Sea and the trade tensions between China and Australia, and with the US navy navigating through the trade passageway of ASEAN, it annoys China and backs up Australia.
These pressing matters cannot be loosely ignored by countries that are not involved directly. However, geopolitical tensions are expected to rise with China using the RCEP as a ticket to secure its cargo vessels escorted by the Chinese navy. The South China Sea passageway weighs in a US$3.4 trillion trade volume. It is a critical and an influential maritime. The far north-west end of Indonesia is the tip of Aceh which shares a sea lane with the Indian archipelago. This is a narrow pathway and is the only exit from the Strait of Melaka into the Indian Ocean.
Shipments from the east will then meet the Indian navy patrolling the Indian sovereignty. India has pulled out from the RCEP agreement, but it has the choice to come back as and when it wishes and deems it fit for the Indian economic advantage. Not to forget that on land, the rising border tension between India and China is very tenuous. The RCEP also enhances China’s infrastructure land diplomacy with ASEAN. It is all connected, and China is funding it. This makes the entire RCEP quite unsettling.
It is larger than just trade, but it presents to firms an opportunity to anchor down and structure a conducive entrepreneurial roadmap. For many firms, because of China, physical and digital infrastructure is taken care of. For firms, because of the presence of the navies, the seaways are guarded. Firms’ worry of logistics and transportation are lifted by this. With the RCEP, firms’ burden to manage tariffs and customs procedures has been sorted out and documented. RCEP governments have committed to publish laws, regulations, and procedures regarding government procurement as well as tender opportunities.
This makes the firms’ concerns of greater transparency resolved. All participating members of the initiative have called for an online customer protection, an online personal information protection, and a secured acceptance of electronic signatures. This facilitates a more conducive digital trade environment. Firms’ trading through the internet is now assured.
The agreement also covers two important aspects on the ease to invest and standards of intellectual property protection and enforcement. Many trade issues that would normally worry firms are now lifted, but there will still be matters to deal with, and firms must constantly remember that the noodle is not straight in a bowl as it is in the packaging.
What firms can be assured of is that the ends of a noodle strand will always touch another noodle, and it perpetuates. Even if a noodle strand breaks, the ends will still touch another.
The supply chain is assured. The RCEP shifts the responsibility of connecting the supply chains to the firms. The building blocks in creating a 10-year roadmap begin with the firms’ current trade realities, fixing weaknesses, enhancing strengths, having a broader understanding of the RCEP region, sharpening pathways of execution, assessing trade friendships, and reaching out to new ones.
All these must be carried out at the point of the starting pistol. The RCEP is meant for firms to capitalise on trade advantage but it is the obligation of the participating governments to ensure that their firms are well-prepared, guided and knowledgeable about the RCEP.
Dr Eric Balan is Consultant & Research Fellow of BinaPavo @ kCommerce (M) Sdn Bhd.